Predatory and Parasitic Trading

"Predatory trading induces and/or exploits the need of other investors to reduce their positions."--Markus Brunnermeier, Professor of Economics at Princeton University

"Parasitic traders profit from trades that other traders make...They make money when they correctly anticipate how other traders (the Big Boys) will affect prices"--Lawrence Harris, Professor of Finance at USC and former Chief Economist at the Securities and Exchange Commission

"Parasitic traders use exposed information to profit at the expense of vulnerable traders"----Lawrence Harris, Professor of Finance at USC and former Chief Economist at the Securities and Exchange Commission

"In any market, as in any poker game, there is a fool. The astute investor Warren Buffett is fond of saying that any player unaware of the fool in the market probably is the fool in the market...Knowing about markets is knowing about other people's weaknesses."--Michael Lewis, Liar's Poker



My approach to trading is based on the premise that order flow can occasionally, and only occasionally, be anticipated. In other words, my trading approach is focused on exploiting the inefficiencies in market microstructure that force the Big Boys to enter, leave, or reposition themselves within the market.

Before I say more, let me begin by introducing myself and explaining my journey as a trader: I have been a university professor for 10 years, and I love my job. However, as a state employee, the current economic downturn has made it very clear that my economic prospects are too closely tied to my job, and the economy. Two years ago, my recognition of this led me to decide to start a business, and after coming up with a few great ideas, I kept running into the same hurdle: I don't want my success to be dependent upon someone else's ability to perform. Trading offers a great solution to this problem.

I became interested in trading during the Spring, 2010. Just at the Greek debt crisis began to unfold, Goldman Sachs was implicated in the debt cover up. A few days later, Warren Buffett, said that he believed that Goldman Sachs would successfully weather the storm. The next day, based solely upon Buffett's words, the Goldman's stock went up 8%. That incident demystified financial markets for me, and made me incredibly curious.

I initially started reading about the stock market, but somehow currency became my main focus. After graduating from Babypips, I began an intensive study of the two FF threads with the most participants at the time: James16 and Jacko. I was never able to profitably trade either approach.

After reading and unsuccessfully demo trading strategies from a number of threads based upon price action, chart patterns, I was about to give up. Then, I came across a post by someone who mentioned that they didn't use charts to trade. So I decided to see if I could trade without charts, or at least make them a supplemental tool.

I have read a number of books on trading strategies and trading psychology. To be honest, I think that I have put as much work into studying the foreign exchange market as I did into getting my Master's degree at UCLA. However, it was not until I started reading the academic literature on trading and foreign exchange microstructure that currency trading began to make sense to me. Now that I understand the academic fundamentals, I can tell when a popular book has relevant information.

Don't get me wrong, I don't think that the academics have it all figured out, but reading the academic literature has helped me make better decisions about which information sources can help me become a profitable trader, and which ones are using me to make their profit.

I am not going to lay out a trading plan now, but I will offer a syllabus. Of the numerous books and articles that I have read, the nine below are the ones that have been most helpful to me.


A. Market Microstructure, Macroeconomics, and Intermarket Analysis: Why do Markets exist? Who are the Big Boys? Are Markets efficient? How does the search for liquidity influence the market? Where are we in the Business Cycle? How do interest rates, inflation, GDP influence the currency markets? Is credit contracting or expanding? Risk Aversion or Risk Appetite? How are the markets interrelated?

1. Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris, Professor of Finance at USC and former Chief Economist for the Securities and Exchange Commission

2. A Concise Guide to Macroeconomics: What Managers, Executives, and Students Need to Know by David Moss, Professor of Business, Government, and the International Economy at Harvard University

3. Currency Trading and Intermarket Analysis: How to Profit from Shifting Currents in Global Markets by Ashraf Laidi

4. Trader Vic: Methods of a Wall Street Master by Victor Sperandeo (especially Chapter 10)

B. Case Studies: The first four texts can be quite abstract and academic. The next two books tell the stories of some of the most successful traders who have developed trading strategies based upon an understanding of market microstructure, macroeconomics, and intermarket analysis. If my goal is to base my trades on the big boys, I have to understand how they trade.

5. More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

6. Reminiscences of a Stock Operator by Edwin Lefevre


C. Trading Psychology and Sentiment: How does hope, fear, and ego influence trading decisions? What's on the market's mind right now? How should sentiment influence our trading plans?


7. The Psychology of the Foreign Exchange Market by Thomas Oberlechner, Professor of Psychology at Webster University

8. The Way of the Dollar: Trading Currencies for Profit by John Percival

9. Research Papers by Carol Osler, Professor, Brandeis University International Business School: http://people.brandeis.edu/~cosler/


I chose my user name because it reflects my trading goals. In Market Wizards, Mark Weinstein referenced cheetahs to make a point: "Most people will not wait for an environment to tip itself off. They will walk into the forest when it is still dark, while I wait until it gets light. Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week, waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, preferably one that is sick or lame. Only then, when there is no chance it can lose it's prey, does it attack. That, to me, is the epitome of professional trading.”

This passage resonates with me because I believe that the shifts in order flow can be anticipated. And, it is my reponsibility to patiently wait for discrepancies between events and expectations to occur.

I have a good theoretical understanding of what I am attempting to do, now I need some market experience. That's why I've decided to start this journal. Here, I will chronicle my thoughts on what's moving the market, and how I am positioning myself to take advantage of market mispricings and inefficiencies.

Nothing posted in this journal should be taken as trading advice. Please trade your own analysis of the market.

Wish me luck

P.S. You might notice more grammatical and spelling errors than you'd expect from a professor. I can become quite anal about proofreading and editing. If I don't ignore it, I will spend too much time editing, and as a result, I will lose focus on the main purpose of my journal. Sorry!

i will look forward to seeing your plan and results

good luck


JB

Quick thinking is important to the way that I approach the market. I have to be able to make swift decisions, and the only way I can do so is through pre-planning.

I must admit that I spend a lot of time thinking about the market. That's a good thing, because it places me in position to anticipate. By processing all of the potential outcomes of an event beforehand, I am in position to implement my plan when the event plays out, rather than guessing (gambling).

Hence, it is my goal to write a weekly trading plan. Since this is my first week doing so, it took much longer than I planned, but I found some great resources in the process

The first two questions that I ask are:

1. What type of environment are we in: Risk On or Risk Off? Risk Appetite or Risk Aversion?

If you are familiar with these terms, you should have a sense of where money flows when it's a risk-off environment. We are clearly in a strong risk aversion market. This alone is enough to explain the strong capital flows into the Swiss franc, Japanese Yen, and gold.

2. What's on the Market's Mind?

This week: The US Debt Ceiling, Eurozone Debt, and the US Nonfarm Payroll Report (NFP). Clearly, the Debt Ceiling debate, which really is a proxy for the discussion of the health of the US economy, as well as, the threat of debt contagion in the Eurozone are the two dominant medium and long-term themes.

The fact that the Euro and the US Dollar are at the center of market risk makes for a fairly complicated market environment. The US dollar is usually a safe haven, but the US' economic troubles have reduced its role as such. Both the Swiss franc and Yen are at all-time highs or long-time highs in relationship to the US dollar and Euro. Typically, the Swiss and Japanese central banks are most uncomfortable with the strength of their currency because they have trade surpluses, and are export based economies. However, it doesn't look like we will see central bank intervention until the market is able to process the the implications of the US debt ceiling deal what might be reached in the US.

Furthermore, in May 2011, at the Swiss Economic Forum in Interlaken, Swiss Economy Minister Johann Schneider-Ammann urged the country’s business elite to “learn to live” with the strong franc, in an apparent sign that the Swiss government is unlikely to step up measures to assist the country’s companies in their struggle with the strong currency. (LINK). Hence, to what degree will the Swiss be willing to intervene?

Furthermore, one of the questions being discussed today is whether a weakened dollar will help speed up the US economic recovery (LINK). Is a weakened dollar in the best interest of the global economic recovery? This is a question that I will have to spend some time studying this week.

Since I live in Washington DC, and am unwilling to trade throughout the night, the majority of the events that I will be targeting take place at times conducive to my lifestyle. I don't focus on any currency pairs, but the US dollar factors heavily in my decisions.

I should probably state that I only expect to take 3-5 trades per month. That's one of the main reasons, why it is important to be prepared to attack if any of the following events present an opportunity. From Reminiscences of a Stock Operator: "There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily—or sufficient knowledge to make his play an intelligent play...The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages."


Here are the events that will be at the center of my planning for the week:



A. US Debt Ceiling Deal--If the $2.1 trillion dollar deal gets passed, I think we might see a US Dollar rally. If so, I might look to place a USD/JPY trade because I think the Japanese economy is most heavily invested in strengthening the US dollar. I am not sure that the rally will be long term, especially since 2.1 tril is less than the 4 tril that the ratings agencies asked to see. I'm not really sure how to play this one. I will watch closely, but if I don't can't see the play, I will stay on the sidelines.

B. Reserve Bank of Australia (RBA) Interest Rate Decision, August 2 @ 12:30 am. The consensus is that rates will remain the same.

C. U.S. ISM Non-Manufacturing Index, August 3 @ 10:30 a.m. After a disastrous Manufacturing ISM on Monday, I think this one might contribute to the US dollar's fall. The consensus is that this ISM will expand to 53.7.

D. Bank of England (BOE) Interest Rate Decision, August 4 @ 7:00 am. The consensus is that rates will remain the same.

E. European Central Bank (ECB) Press Conference, August 4 @ 7:45 am. The consensus is that rates will remain the same.

F. Bank of Japan (BOJ) Interest Rate Decision, August 5 @ 12:00 am. The consensus is that rates will remain the same.

G. Canadian Unemployment Rate and Canadian Payroll, August 5 @ 7 am. The consensus is that the unemployment rate will stay at 7.4%, and that the economy will add 15-23K jobs, which will be slower growth than expected. This probably will not lead to a big move because most of the big players will be positioning themselves for the NFP.

H. US Unemployment and Nonfarm Payrolls (NFP), August 5 8:30 am. The consensus is that the unemployment rate will hover around 9.2%, and that the Nonfarm Payroll will add 92K jobs.

Looks like you've really put some effort into your analysis...tight work. I agree with many of the points you've put forward. I'd also add in possible BoJ Intervention as something that's on the market's mind to keep an eye out on if you're trading the XXX/JPY pairs.

Subscribed!
xXTrizzleXx

Here's an event that I was unprepared for today: The June Personal Income report. The consensus was 0.3%. The report can in at a meager 0.1% I should have been ready, I will put this on the watchlist, especially when all negative news seems to move the market against the USD.

Now that it is over, I wonder how I would have structured the trade. Let me go through some initial thoughts before I take a look at the charts.

The interventionist talk by the BOJ would have made a U/J trade unlikely.

Since the Euro is the anti-dollar, it probably would have benefitted from this news. E/U seems like a good choice.

IMF recently said that the Aussie dollar is overbought by 10-15% (LINK). Nonetheless, with the increase in gold prices it looks like the Aussie strength isn't troubling the market now. Not sure I would have gone this route.

CHF seems to be the favored safe haven, and we still haven't heard any interventionist talk out of the SNB. Seems like a good choice, too.

On last Friday when the the weak GDP numbers came out, the USD lost big against every currency except CAD. I probably would not have given the CAD a chance with this announcement.

The spread made NZD/USD a nonstarter.

The G/U seems like a good choice.

Based upon looking at these factors, I probably would have chosen the E/U as my pair. However, looking at the charts, I probably would have decided on the G/U. It looks like there was a stop run right before the announcement. The G/U saw an almost 50 pip drop between 7:50-8:20 am.


Here's how the report impacted the majors. One thing is clear, these moves were the result of US weakness.


E/U 1.4155 @ 8:30
1.4234 @ 9:00
1.4280 @ 10:00

G/U 1.6223 @ 8:30
1.6260 @ 9:00
1.6286 @ 10:00

A/U 108.28 @ 8:30
108.44 @ 9:00
108.56 @ 10:00

U/J 77.42 @ 8:30
77.22 @ 9:00
77.05 @ 10:00

U/CHF .7798 @ 8:30
.7775 @ 9:00
.7735 @ 10:00

U/CAD .9617 @ 8:30
.9602 @ 9:00
.9581 @ 10:00


The E/U was clearly the powerhouse trade between 8:30-10 am. However, the G/U would have been a winner, too. In fact, all of them were winners.

Next month: I'll be ready

It looks like my initial weekly plan was not as thorough as it could have been.

At the moment, I am preparing for the retail sales numbers from Australia, which will be will be released in a few minutes @ 9:30 pm. The consensus number is 0.4%. If we get a strong deviation from the number, I will initiate an A/U trade.

Here's one analysts take on what might happen: "With low Unemployment Rate and being one of the most sought after currencies out of the majors, today’s Retail Sales could come slightly better than expected… However, recent CPI reading has shown that disposable incomes are being squeezed out by persistent inflationary pressures, and with the appreciation of the AUD at a much slower pace during the month of June, Retail Sales could be slightly worse than expected… Therefore, there should be no pre-news trading for this release as it is quite unpredictable."

For more, click (Here)


EDIT: This could have been a quick 50+ pip trade, but I had to settle for 30 pips. It took me a few minutes to find info on the release. This move was faded back to the initiating level 3 hours later.

Hi Cheetah
As promised, I had a look at your thread. It's still early days and just the first page but I get the feeling this is going to be a very interesting thread and I look forward to reading more from you. Thanks for posting the link on XX's thread.
Subscribed!

Very thoughtful posts Sir. I trade in a very similar fashion (relying on news to get me into a trade) What you need is a trigger sheet...It's a reference sheet that has years of reaction (# of pips) per news event. I spent about 30 hours going over G/U and compiling it's reaction to every news release of 4 years. That data/historical analysis give me GREAT confidence in pulling the trigger (actually, I let the price action pull the trigger for me). Once in the trade I already have a high statistical probability of hitting a historically based and averaged pip target.

Just a thought, love the title of the thread by the way.

Keep it flowing Prof!

Congrats on a great journal and well thought out trading plan Cheetah. Hope you keep it up and although I am just starting out and learning this type of trading, hope to be able to contribute in the future.

@pilotui
Im currently doing the same thing and trying to plot pip movements in regards to news, just curious on what was your method? my method is to measure rally from the news till retrace / pullback and I also document the sentiment to help explain some of the extension of the rally.
Would be interesting to get some ideas from cheetah, bug and trizzle and other subscribers if they document the pip movements from news / reports and if they care to share their methods.

I must admit that putting together this weekly focus takes time. However, I really think that taking the time to read the bank reports, and other forecasts is quite beneficial.

Let me start by re-capping last week. I only took one trade, and that was due to a number of factors. Firstly, putting together my plan took more time than I expected. Hence, I was unprepared for the ISM Manufacturing Report on Monday morning. This might have been the best trade of the week. I am glad that I was able to observe it. I learned a valuable fact: 50.0 level is quite important. Anything below it is quite negative.

I also missed the Canadian Employment Numbers trade on Friday morning. My first mistake was that I assumed the market would be especially quiet while waiting for the US NFP numbers. I was wrong. When the expected 28K jobs only produced 7K, that was a significant opportunity for many players to position themselves for their NFP expectations.

The only trade that I took this week was based upon the Australian Employment Numbers. It looks like last week was a week of missed opportunities for me. Oh well.

I am glad that I didn't try to jump into a trade at the beginning of this week to make up for the trades that I missed last week. If you are going to successfully trade the foreign exchange markets, missed opportunities are a way of life.

How could I have gotten this far without mentioning the mother of missed trades? The BOJ's intervention. To be honest, I missed that one simply because I am inexperienced. The BOJ made it's intentions quite clear: it was going to intervene after the US debt ceiling deal had been passed. (LINK) I should have made it a priority to sit at my computer, and I just should have waited for it. The play was so obvious, and that is the trade that you wait for. It's also the trade that you bet the house on. However, it required you to stalk it, and I failed to do so. I knew it was coming. I had a good idea when it was going to happen, but I did not move everything out of the way to catch it. At the time I was packing and planning my trip to Miami Beach (I left the next morning). However, my failure to hunt the trade caused me to miss a game changing trade.

I didn't state this earlier, but my goal is not to risk 1-2% per trade. My aim is to only take trades that are worthy of a 10-15% risk. Hence, I have to have supreme confidence in my research, my analysis of risk appetite, my sensitivity to market sentiment, and my reading of the big boys. This style of trading means that I can't be upset by missed trades. In fact, I expect to miss the majority of good trades. Oh well.

I used to think that trading was about probability. I don't anymore. There are times that we can know how markets are going to respond to stimuli, and those are the only trades I plan to take. For me, risking big is how I plan to maintain my discipline.

This isn't a plan that I would recommend to anyone, but you have to be true to your personality.

Enough of that tangent...This past week emphasized how unpredictable the markets can be. We might be in for more of the same this week.

I was unsure of how the markets would react to the S & P downgrade of the US so I stayed away. It looks like there were some great gap trades available when the markets opened. Perhaps, I need to investigate them so that I can be prepared the next time that important news breaks after the markets have closed.

After the S & P downgrade, the "R" has been timidly tossed around. Are we heading back into a recession? More importantly, are the big boys positioning themselves for it? At the very least, we are entering a period of tremendous risk aversion, which should halt a widespread dollar sell-off.

Certainly, the safe havens (CHF, JPY, GOLD, and the USD) will benefit. Some might ask how the US can be considered a safe haven when it is at the center of the problems. As a Danske Bank report noted, "First, the dollar has been (and is being) used as a funding currency. When risk appetite declines, investors scale back exposure to risky assets, which tends to trigger an unwinding of short dollar positions. Second, the dollar market is the most liquid in the world and US Treasuries have (until now) been regarded as the best instrument to secure capital protection. This tends to increase demand for USD assets during periods of falling risk appetite. The net dollar effect of a credit downgrade will thus depend on the increase in the US risk premium (dollar negative) compared with the dollar positive flows resulting from a drop in market risk appetite"

Or as another report noted, "The US hosts the deepest capital markets in the world with few sizable alternatives leaving it with a tremendous advantage, particularly in a time of crisis, even if the epicenter is the US itself." This was clearly the case in 2008.

If I had to ask myself what's on the market's mind right now, I would answer the fear of debt contagion in Europe, other potential ratings downgrades, and given the threat of intervention by BOJ and SNB, which safe haven is really safe? To be honest, I am not sure that I have a strong grasp of the market's sentiment right now. Or, at least, I don't know how to structure a trade around it. That's why I like to use events and expectations as triggers. At times, it helps me structure trades.

On second thought, I probably know more than I am giving myself credit for knowing. I think the commodity currencies are headed for a fall. One interesting note is the relationship between gold and AUD. Typically, when gold rises, so does AUD, but that correlation seems to be falling apart.

One of the biggest problems at the moment is that "No country seems to want a rising currency—and that poses a problem for a world economy struggling with weakening prospects for growth in the world's biggest developed nations. Rising currencies in overheating economies with rising inflation worries—as with Brazil or much of southeast Asia—are a textbook antidote to inflation" (LINK).

These are the events that I am going to focus on this week:

1. China CPI- Consumer Price Index, the main measure of inflation in the world’s second-largest economy, Mon., Aug. 8, 10:00 pm, ET. Consensus: 6.4%

I will not trade this one, but it is quite important to think about the Chinese economy. It has been the biggest driver of growth since 2008. I think that anything negative coming out of China will drive investors to the safe havens, and I think that it could have a very negative impact on the Australian economy, which sells lots of commodities to China.

2. U.S. FOMC- Federal Open Market Committee Interest Rate Announcement, Tues., Aug. 9, 2:15 pm, ET. Consensus: Flat rate.

This is one of the big events of the week. A rate cut or increase is probably not going to happen, but will Bernanke signal QE3? How will his statements influence risk on/off?

3. AUD- Australia Employment Situation and Unemployment Rate, the main gauge of employment trends and labor market conditions, Wed., Aug. 10, 9:30 pm, ET. Consensus: 10.3k and 4.9%

This is an important trade to me because in a risk off environment, I think a negative number could further scare investors.

4. . USD- U.S. Jobless Claims, an important gauge of employment trends and labor market conditions, Thurs., Aug. 11, 8:30 am, ET. Consensus: 402k

These numbers have consistently hovered around 400K. A number of 375K would cause some serious, positive movement. I don't think it will get close to 375k, but if it did it might start a rally.

5. USD- U.S. Retail Sales, an important gauge of consumer spending measuring the total receipts at retail establishments, Fri., Aug. 12, 8:30 am, ET. Consensus: 0.4%

This probably the biggest announcement of the week. These numbers are a major indicator of the health of the US economy.


Well, from the looks of things, I won't have many opportunities this week. But, I will continue to monitor the bank reports, and my preferred websites so that I can prepare for the opportunities as the arise.

Of course the big trade this week is the S & P downgrade of the US over the weekend. Since the opening of the market, there is a clear, full-scale shift to risk aversion. In this environment, the unwinding of carry trades is quite common. Three simple, big money trades were all you needed to amass a big profit: A/U, N/U, and U/CAD.

AUS/USD has already fallen 450+ pips in 30 hours.
NZD/USD has already fallen 400+ pips.
USD/CAD had already risen 180+ pips.

CHF and JPY trades against the commodity currencies also performed quite well.

One of the reasons that these trades began to turn around is the Tuesday's FOMC meeting where the markets are expecting the beginning of QE3, which would weaken the dollar.

In hindsight, I read over the weekend that Tuesday's FOMC might lead to QE3 or some other intervention, so I probably should have traded the commodity currencies against CHF. The SNB probably wouldn't have intervened against these currencies.

To trade effectively, you really have to try to play out all of the scenarios in your head. Had I done so, I probably could have structured a much more lucrative trade. To often retail traders are scared away by the higher transaction costs associated with the crosses. When you know what's going to happen, the best trades often involves trading the safe havens (CHF, JPY) against the commodities (AUD, NZD, CAD), especially when you can identify a safe haven and a commodity currency that have recently been involved in a carry trade.

When you are hunting the Big Boys, you have to think two or three steps ahead.

Jonas:

Thanks for the well wishes. I agree with pilotui. It is a good idea to have a sense of how far you can expect a currency to move based upon given situations. Some news will cause a 30 pip move. Other times the same news might initiate a 300 pip move. I think it is really hard to figure this out by backtesting, and looking to the past for direction.

I would recommend forward testing because sentiment is very important. Remember, it's not just the news event, but it is the context in which the news is released that matters most.

For example, frequently AUD moves up when gold moves up because Australia is a big exporter. However, right now gold is moving up because it is considered a safe haven, but AUD tends to move lower during periods of risk aversion. Therefore, in this context we should not expect AUD to rise along with gold.

Here is some great advice from grkfx that I am yet to follow, but I plan to move toward this. By the way, this was posted a while ago so ignore the specific E/U analysis:


This is time consuming, but I really think that you'd would gain more by focusing on forward testing your analysis.

It is my belief that it is more important for me to spend more time preparing to trade, than it is to spend time trading. I know that is contrary to FF general wisdom, but we all have to find what works for us.

Heya TheCheetah,

Personally I identify with and agree strongly with your notion of forward testing and incorporating sentiment. As soon as school went out, I did the exercise grkfx posited for two months and I found it to be a very rewarding experience.

I enjoy reading your weekly focuses and implore you to keep it up - I'd even like to devote some time myself to formulate similar disciplined weekly approaches. Your analysis for the risk aversion/flight to safety trades were spot on, and now that you know what the event looks like, as well as its magnitude, I'm sure you'll be able to catch the next unwind. Same applies for the BoJ intervention...we may even get to play with them again soon if we're lucky. That's definitely a 10% risk trade right there, but it requires 90% patience!

Regards,
xXTrizzleXx

Okay Trizzle:

That was the push that I needed. I will get started. I think it is best for me to do it in a public manner, it will help me organize my thoughts.

What moved the market today?


NZD/USD moved three hundred pips in an hour after the FOMC meeting. Not sure why this happened, was it Asian Central Bank (ACB) intervention? The FOMC announcement certainly should not have shifted this currency to a risk off position. More than likely this was a stop hunt. It definitely happened in an illiquid moment. This might be a move worth fading. Actually, it just might have been the disappointing non-event that was the FOMC announcement.

CAD is commodity and interest rate sensitive. The fact that oil is at 80 a barrel is not going to help this currency. Long term this currency should fall due to risk aversion. However, today the threat of QE3 moved USD/CAD 250+ pips today.

AUD/USD also moved 300+ pips after the disappointing FOMC news. We should see AUS fall, especially since it is unlikely that China will stimulate the world's economy like it did in 2008, and AUD was a major beneficiary because of its commodities, especially copper (LINK).
Like the loonie, AUD is commodity and interest rate differential sensitive.

CHF continues to perform at historic levels against the EUR and USD. It might be that the SNB has realized that intervention is futile.

GBP/USD moved down over 200+ pips. I am not sure if this was due to the riots earlier in the morning, but rallied later after the disappointing FOMC.

USD Overnight USD benefitted handsomely from the unwinding of carry trades involving the NZD, AUD, and CAD. Perhaps, this was precipitated by the desire to move capital into US treasury bonds.

However, the market's anticipation of a big announcement at the FOMC meeting erased those gains quickly.

An interesting day, indeed.

hey Cheetah,

Those are excellent advice from grkfx, thanks for posting it.

Now this are just my thought, correct me if Im wrong guys or if my thinking is still way off

We should see a lower AUD in near future, fear of global recession and signs of contraction pretty much everywhere should see the AUD fall, plus there is possibility of rate cut next meeting, so maybe we should possition ourselves for that and when that time comes AUD maybe at bargain prices for a move up, or maybe its already priced in? and also since I live in Australia, theres is also the issue of the carbon tax maybe implemented mid next year, which would choke the commodity sector, which is pretty much the only thing driving Australia at the moment, so that could be a long term play.

High possibillity of rate hike for NZD next meeting should be interesting and we could get a nice rally before it follows the AUD lower.

With JPY, not sure if BoJ would step in again, they've been coming out with same rhetoric recently but I also read form one of the ministers that they are contemplating monetary policies for weakening the yen.

Now how to play all these scenarios? lol. Do you guys think Im thinking too far ahead? should I keep all this in mind but play, read and trade the current sentiment and situation?

Atleast Im learning something trading this way instead of just looking at a colorfull chart, lol. Thanks again

And with GBP also I had a feeling we had a DNT option barrier at 1.6200 and 1.6500 which would probably explain the range of the pair. As of yesterday 1.6200 has now been taken out or maybe it has expired, with this out of the way and the slowing british economy, we may see GBP go down to 1.6100-1.6000 before any bids come in. Any thoughts guys?

Jonas:

I think your observations are sound. I really think that the AUD will fall. To me, the lack of demand for commodities in China will be one of the leading factors in the decline of the AUD.

I had not heard about the carbon tax. Thanks for putting it on my radar.

I can't tell you how to play your game. You have to figure that out. However, I think you are on the right track.

It's going to take awhile, but keep plugging away.

I don't see any positive signs for a global economic recovery. Hence, risk aversion is clearly dominating this market. But, what moved the market today?


USD

The lack of positive international data means that the USD received some positive capital flows because international money is still flowing into US treasuries despite record low yields.

The weak FOMC statement means that the markets will look towards Bernanke's August 26 speech. It will be interested to see what the predictions are, and how they get priced in. I'll be watching closely.


Long term it does not look like the Republicans are ready to change their tactics. Hence, we will probably still see political dysfunction lead the way forward in the US as the politicians use this economic crisis for political gain. All of the Republican appointees to the Super Congress have signed a no tax pledge. (LINK)


CHF

The SNB boosted the supply of liquidity to banks by expanding sight deposits to 120 billion francs ($165 billion) from 80 billion francs. It will also conduct foreign-exchange swap transactions, a tool last used in 2008. The central bank said it’s ready to take further measures if needed.

Daniel Kalt, chief Swiss economist at UBS AG in Zurich, suggested that it may take the SNB up to 200 billion francs. He says he doesn't believe that a coordinated intervention is in the works. I don't see the SNB intervening, especially after how unsuccessful the BOJ intervention was. Lately, the most successful interventions only seem to last a few days.

After the dollar lost 5% to the CHF after the FOMC meeting, it was not a surprise to see a few people fade the move.

EUR

The euro lost ground early today because of the fear that the French might face a credit downgrade.

JPY

Will we see another BOJ intervention soon?

"Japan's intervention funds are determined by the outstanding MoF financing bills, say dealers. This fiscal year's budget allots JPY 150 trn, of which 117 trn has been drawn down. This means that there is only about JPY 33 trn for additional intervention without reverting to expanding the fund. That may limit the capacity for more JPY intervention" (LINK).

However, there are a number of Big Boys on the lookout for intervention.


GBP

The GBP was down early due to the BOE inflation report. The GDP growth pace forecast for 2011 was reduced from 2.5% (May estimate) to 2.0%. It looks like the currency will stay in a range until next week. There are some important releases ahead.

July inflation numbers are first up, on Tuesday, followed by minutes of the last BOE Monetary Policy Committee meeting and unemployment figures on Wednesday, then retail sales on Thursday.


China


With Europe in crisis, and Japan and the U.S. struggling with their debt, demand for China's exports will stagnate.

This means China has some painful decisions to make if it is to reorient its economy away from investment. If the Chinese stop investing in infrastructure that will be bad for AUD.

AUD

Early in the day I read this: "The market isn’t interested in good news at the moment and probably won’t react to a better-than-expected number but if the rate comes in above 5% then that will increase the possibility of a rate cut in September, in which case the AUD would get sold."

The consensus was that the the Australian unemployment rate would hold consistent at 4.9% After it came in at 5.1%, the A/U dropped 95 pips in 2 minutes. I faded the move.

For those of you that are unfamiliar with a fade trade, I think merlin summed it up best:

I played the retrace for 40 pips. However, it moved much higher. I was a bit surprised by that. Why? Was it China buying AUD? How much of it was due to low liquidity? Did the Big Boys see it as increasing the likelihood of a rate cut in September?
To what extent should the rise in unemployment be seen as a threat to the rate cut that is expected in September that has been relatively priced in?

I think that my preceding posts really lays out some of the fundamental and sentimental reasons why price moved. However, it is important to note that much of today's movements were motivated by value.

Bernanke's FOMC comments caused a brief rally, but he did not make any real decisions. Many traders looked at the rally and decided that certain pairs were mispriced, and entered trades simply because there were opportunities to get into pairs at a good discount.

I failed to mention this for the specific currencies, but many times currencies move up and down simply because value traders decided that the currencies were trading at bargain prices.

I lost track of this important fact when i penned my earlier thoughts. I can't let it happen again. If I do, I will miss some fantastic opportunities.

The analysts always like to have some fundamental reasons for movements, but the reality is that some of the big shifts are initiated by profit taking, stop hunting/barrier option, or value considerations.

What moved the markets today? What is on the market’s mind?

We’ve seen some sharp movements today. Is it because of thin liquidity, or are these sharp moves motivated by profit taking?
In order to be a predatory and parasitic trader you have to see the opportunities before they appear. It’s challenging, but it gets easier as you gain more experience thinking in this manner. Some days it’s frustrating. Take the CHF for example:

CHF
At about 9 am I read about the SNB’s rhetoric about pegging CHF to EUR. The SNB had really revved up the talk the last few days, but I just didn’t see that threat as a serious order flow generator. I was wrong. A few weeks ago, USD/CHF was trading at .8400. It looks like a number of the Big Boys were spooked in booking their 600-1000 pip gains.
Will this threat continue to drive down the price of CHF, or will the 400 pip rise in EUR/CHF, and the 400 pip rebound of USD/CHF motivate value traders to enter?
It is going to be difficult to peg CHF to the Euro. I think we will see a return to CHF strength soon. All it will take is some more bad news out of the Eurozone or the US. Be ready!
At the same time, we might be entering into a space where the Big Boys will continue to bait the SNB.

GBP
At the moment, I am neutral on this currency. I can’t get a good reading. The riots, and the larger unemployment issue hasn’t garnered the market’s attention. As I wrote yesterday next week’s announcements might drive this currency.
One thing that we know is that growth expectations are low. BNP Paribas expects the U.K. economy to grow 1.3 percent this year and 1.6 percent in 2012 "with risks to the downside for both forecasts due to global economic uncertainties," Saywell added."

AUS
The unemployment numbers were worse than expected, but we saw the AUS gain strength afterwards. Was it Chinese buying? Or are market watchers turning sour on their expectations that the RBA will raise rates in September?

To be honest, I have no explanation for the 200 pip rise in AUD/USD or NZD/USD today.


JPY

The threat of intervention has probably kept a few of the Big Boys away from increasing their positions here. Still trying to see if I should go on intervention watch tonight. I will try to make sure I am near my computer at 8 pm tonight.

I think Scotia Bank clearly defined the market climate that we are trying to navigate:

“GLOBAL FX THEMES – THE IMPACT FOR CURRENCIES IN MEDIUM TERM

Currencies cannot all weaken together, but in isolation most currency stories are negative:

USD – fiscal problems, loose monetary policy, desire for debasement & sentiment.

EUR – sovereign crisis, fragile union, growth prospects & sentiment.

CAD – ties to US economy, dropping oil prices, interest rate spreads, risk aversion.

GBP – low growth, loose monetary policy, strict austerity.

CHF – at record highs against USD, EUR, CAD....fatigue.

JPY – official intervention, weak medium term fundamentals, loose monetary policy.”




The US retail numbers will take center stage tomorrow. I will begin to play out scenarios over the next few hours.